- Clients pulled $52.7 billion as Total Return beat 89% of peers
- Fund outperformed by dodging energy and emerging-market debt
Investors who pulled an estimated $52.7 billion from the Pimco Total Return Fund this year may feel like freeway drivers who changed lanes only to see themselves falling behind traffic.
The erstwhile largest bond mutual fund outperformed 89 percent of peers in the first calendar year since the ouster of its former manager Bill Gross, returning almost 1 percent through Dec. 28, according to data compiled by Bloomberg. Among those it bested were four of the five funds with the largest influx of new money this year through Nov. 30 that Bloomberg classifies as following total return strategies.
The performance, a rebound from two years in which it trailed a majority of peers, helped slow a torrent of redemptions following the September 2014 departure of Gross, who had built Total Return into a $293 billion behemoth at its peak in 2013. The fund, which now has $92 billion in assets, avoided the debt of energy companies, emerging markets and other high-yield bonds that caused losses for many investors, according to Scott Mather and Mihir Worah, two of the fund’s three co-managers.
“We’ve been defensive,” Worah said in a conference room at Pacific Investment Management Co.’s headquarters in Newport Beach, California, overlooking the Pacific Ocean. “We now expect to be selectively offensive.”
For 2016, the managers say they see opportunities in energy-related investments, including Mexican government bonds, and currencies such as the Russian ruble, Norwegian krone and Canadian dollar. Pimco’s forecasts include an expectation that oil will climb to a range of $50 to $70 a barrel, almost double the recent crude price lows.
“The next opportunity that gives you returns -- it’s staring you in the face,” said Worah. “It’s energy markets and emerging markets. Sometime in the next six to 18 months is probably going to be the next opportunity.”
Pimco’s fund this year has outperformed rivals from TCW Group, Dodge & Cox, Vanguard Group and Fidelity Investments, the recipients of the biggest inflows in the strategy. The $69.7 billion Metropolitan West Total Return Bond Fund, which received more than $18 billion in net new money, according to data compiled by Bloomberg, is up 0.4 percent in 2015. It outperformed Pimco Total Return over three and five years.
Doug Morris, a spokesman for TCW Group, the parent of the MetWest funds, declined to comment.
The Pimco flagship has also done better this year than the $43.9 billion Dodge & Cox Income Fund, which attracted $4.7 billion and has declined 0.5 percent, according to data compiled by Bloomberg.
“On a three, five and ten year basis, the fund has outperformed its benchmark and the majority of its peers,” Steve Gorski, a spokesman for San Francisco-based Dodge & Cox, said in an e-mail.
The $22.2 billion Fidelity Total Bond Fund, recipient of $4.3 billion in inflows, is down 0.3 percent in 2015. The Fidelity fund was hurt by investments in high-yield bonds, which lost ground mostly in the second half of the year, said Sophie Launay, a Fidelity spokeswoman.
“Recently the fund’s performance has been affected by an overweight in non-investment grade positions,” Launay said in an e-mail. “The portfolio managers have looked to take advantage of attractively priced securities in high yield, leverage loans and emerging market debt that they believe could benefit the fund and its shareholders over the long term.”
Pimco Total Return also beat the $149.7 billion Vanguard Total Bond Market Index Fund, which attracted $10.5 billion through Nov. 30, including assets in an exchange-traded fund share class, and now ranks as the largest bond fund. The Vanguard fund, which tracks the broader market, is up 0.6 percent this year. The $22.5 billion Vanguard Intermediate-Term Bond Index Fund, which tracks an index of five- to 10-year U.S. government and corporate debt, did better than Pimco Total Return in 2015 and the last three and five years, and took in about $5 billion in this year’s first 11 months. One edge for the Vanguard indexed funds is lower fees than actively managed funds like Pimco’s, which can affect returns over time.
“Our philosophy is long term,” said David Hoffman, a spokesman for Vanguard. “When we talk about long term, we talk about three, five, 10 years out. A single year, that’s not long term.”
The DoubleLine Total Return Fund has risen 2.2 percent this year while adding $10.3 billion in net inflows. The fund, headed by Jeffrey Gundlach, is in a different peer group than Pimco Total Return because 86 percent of its $51.7 billion holdings are mortgages, according to data compiled by Bloomberg.
Carl Eichstaedt, who worked at Pimco in the 1990s and who now helps run the $15.3 billion Western Asset Core Plus Bond Fund, said Total Return’s managers deserve respect for generating relatively high returns while experiencing heavy redemptions.
“I have to give them credit, because it’s a difficult situation to be in,” Eichstaedt said in an interview. “They couldn’t afford another mistake.”
Eichstaedt’s fund ranks sixth in inflows at $2.2 billion. It returned 1.5 percent by avoiding energy, while investing in mortgage-backed securities and higher-yielding corporate credit in safer sectors, such as financials.
“The departure of Bill Gross was a significant risk to consider,” Todd Rosenbluth, director of ETF and mutual-fund research at S&P Capital IQ, said in an e-mail. “Investors should be cautious with a fund that has a new manager.”
Mather said Pimco Total Return will attract assets as its team, which helped steer the fund before Gross left, shows it can make money. Mather has been at Pimco for 18 years and Worah has been there 15 years. Their co-manager, Mark Kiesel, joined in 1996.
“We have the same team,” Mather said. “Our view is if you deliver performance, you’ll capture more than your fair share.”